Business Cost Control: How to Work Out Where the Money Goes

A month's costs can be reviewed in five steps: gather them by category, put them in order by amount, split them into groups A, B, and C, compare them with revenue and last month, and decide which groups to look at closely. Attention goes first to the few categories that make up most of your costs.

Let's go through each step on a single example. How to enter transactions and what to record in their fields is covered in separate materials. Here we start from the point when the month's records are already there.

In plain terms. Picture wrapping up the month in a household notebook: first you sort the receipts into piles, then you look at which pile is tallest. A business cost review works the same way: each pile matches a category, and its height matches the amount.

What you need before the review

A review rests on two conditions. First: all of the month's costs are entered. Second: every cost has a category, and the category names stay the same from month to month. Then the figures of two months can be compared, and the difference between them shows the change in costs.

Why should categories stay the same? Comparing months only makes sense when the names haven't changed. If one month had a category called “Marketing” and the next had “Advertising,” the growth of one and the drop of the other would look like a change in costs, even though the costs are the same.

How to review a month's costs

Picture Dmytro. He runs a small cleaning company. This month's revenue is $60,000, and last month's was $48,000. Dmytro sorted all of the month's costs into eight categories. The numbers are illustrative; substitute the tax and contribution rates that apply where you are.

Step one: gather the costs by category. Take the amount for each category over a full month. In Dmytro's case, the total is $45,000.

Category share = Category costs ÷ All costs × 100%

Step two: put them in order and calculate the shares. The categories go from largest to smallest. Salaries: 18,000 ÷ 45,000 = 40%. Materials: 9,000 ÷ 45,000 = 20%. Each one is calculated the same way. Next to it, we write the cumulative share: add materials to salaries and you get 60%, then rent gets you to 72%, and so on up to 100%.

Step three: split into groups A, B, and C. This is ABC analysis, a well-known cost review tool. Group A includes the categories that together make up the first roughly 80% of costs. Group B is the next ones, up to 95%. Group C is the rest. The boundaries of 80, 95, and 100% are typical and serve as a guideline: some methods set them slightly differently.

Four categories out of eight make up 82% of costs. They determine the main part of Dmytro's costs, so it's convenient to look at them first.

Costs to revenue = All costs ÷ Revenue × 100%

Step four: compare with revenue and with last month. Costs to revenue: 45,000 ÷ 60,000 = 75%, meaning every dollar of revenue carries 75 cents of costs. There's no single norm for this ratio, it depends on the field, so it's more useful to compare it with your own past value.

Category change = (This month − Last month) ÷ Last month × 100%

Revenue grew 25%: (60,000 − 48,000) ÷ 48,000. Now we look at group A. Materials: (9,000 − 7,500) ÷ 7,500 = +20%, which is less than the growth in revenue. Advertising: (4,500 − 3,000) ÷ 3,000 = +50%, which is more than the growth in revenue. Salaries and rent didn't change.

Step five: look at “Other.” In Dmytro's case, that's $900, or 2%. If the share of “Other” is growing, costs without an explanation may be piling up in it, so it's worth sorting those transactions into new categories.

Advice. Rising costs aren't a problem by themselves if they brought in revenue. In the example, advertising grew 50% while revenue grew 25%. That's a reason to compare the return from that channel before changing the budget.

What to do with groups A, B, and C

The groups exist so that you don't spend time on small stuff. Each group has its own review rhythm and its own question.

In group A, simple changes produce a noticeable effect: requesting prices from another supplier, revisiting the rent terms, comparing the return from ad channels. In group B, it's convenient to go through subscriptions and rates once a quarter to see which ones aren't being used. Group C needs less attention.

How to make the review regular

A single review shows the picture of a month, while regular reviews show the direction. It's convenient to review costs on the same day after the month closes, and to write down three numbers: the share of group A, costs to revenue, and the categories that changed the most. After three or four months, these numbers form a series in which the trend is visible.

How this looks in your books

The review draws on the “Profit and Loss” report. In the “Breakdown by Category” table, costs are listed by category and month, an arrow next to a category expands its subcategories, and the “Total Expenses” row gives the overall amount. In the “Top Expenses” list, categories are ordered by amount, with a percentage of all costs next to each, so the second step of the review is already done for you.

After you click the “Compare” button, the change against the previous equivalent period appears under the “Income,” “Expenses,” and “Net Profit” cards. Transactions with no category are gathered in a separate “No Category” row. If you click the “Expenses” card, a list of transactions for the same period opens, so you can see which transactions make up the costs. The cumulative share and groups A, B, and C you calculate with the formulas from the article: the report has no separate indicators for them.

You can attach a receipt or photo to a transaction: if a category raises a question, the document is right there next to the record.

Careful. The section has limits. One transaction can't be split across several categories (workaround: two separate transactions), a category can't be changed across several transactions with one click, and there's no filter for transactions by tag.

What's worth remembering

• A review starts with a full month. All costs are entered, and categories are the same from month to month.

• ABC analysis splits costs into three groups. Group A makes up the first roughly 80%, B the next up to 95%, C the rest.

• Attention goes to group A. A few categories determine the main part of costs.

• The comparison has two anchors. Revenue and last month show which categories are growing faster.

• A review works as a habit. A series of several months shows direction better than a single figure.

Frequently asked questions

How do you set up cost control for a business?

Once a month, sort costs by category, order them by amount, split them into groups A, B, and C, and compare them with revenue and last month. Look closely at group A first.

What is ABC analysis of costs?

It's splitting categories into three groups by their contribution to the total: A makes up the first roughly 80% of costs, B the next up to 95%, C the rest. The boundaries are a guideline and depend on the method.

How often should you analyze costs?

Group A monthly, group B quarterly, and group C mostly needs no separate review. The main thing is to do it on the same day each time, so that months are comparable with each other.

What share of costs in revenue is considered normal?

There's no single norm, it depends on the field of business. Compare against your own past value. In the article's example, costs are 75% of revenue.

How do you find categories that grew faster than revenue?

Calculate each category's change against last month and compare it with the change in revenue. Categories whose growth exceeds the growth in revenue are worth looking at first.

What should you do with the “Other” category?

Watch its share. If it's growing, sort its transactions into separate categories so it's visible what they're spent on.